Introduction to Business

1
Introduction to Business

• The Strategy of Multinational Firms

2
Entry Strategy and Strategic Alliances
3
Case Diebold ????

• Began to sell ATM machines in foreign markets in
  1980s
• 1980s Distribution agreement with Philips
• 1990 Diebold establishes joint venture with IBM
• 1997 foreign sales 20 of Diebolds total revenues

4
Case Diebold in China

• Entered China in 1993
• Built first JV in Shanghai
• Started acquisition in the global market
• Each year acquire 3 to 6 firms
• Diebold decides to go it alone with local
  manufacturing presence for local customization
• Through acquisitions
• Joint ventures

5
Basic Foreign Expansion Entry Decisions

• A firm contemplating foreign expansion must make
  three decisions
• Which markets to enter
• When to enter these markets
• What is the scale of entry

6
Which Foreign Markets

• Favorable
• Politically stable developed and developing
  nations
• Free market systems
• No dramatic upsurge in inflation or
  private-sector debt
• Unfavorable
• Politically unstable developing nations with
• a mixed or command economy
• where speculative financial bubbles have led to
  excess borrowing

7
Timing of Entry

• Advantages in early market entry
• First-mover advantage
• Build sales volume
• Move down experience curve and achieve cost
  advantage
• Create switching costs
• Disadvantages
• First mover disadvantage - pioneering costs
• Changes in government policy

8
Scale of Entry

• Large scale entry
• Strategic Commitments - a decision that has a
  long-term impact and is difficult to reverse.
• May cause rivals to rethink market entry.
• May lead to indigenous competitive response.
• Small scale entry
• Time to learn about market.
• Reduces exposure risk.

9
Entry Modes

• Exporting
• Turnkey Projects
• Licensing
• Franchising
• Joint Ventures
• Wholly Owned Subsidiaries

10
Exporting

• Advantages
• Avoids cost of establishing manufacturing
  operations
• May help achieve experience curve and location
  economies
• Disadvantages
• May compete with low-cost location manufacturers
• Possible high transportation costs
• Tariff barriers
• Possible lack of control over marketing reps

11
Turnkey Projects
Contractor agrees to handle every detail of
project for foreign client

• Advantages
• Can earn a return on knowledge asset
• Less risky than conventional FDI
• Disadvantages
• No long-term interest in the foreign country
• May create a competitor
• Selling process technology may be selling
  competitive advantage as well

12
Licensing

• Reduces development costs and risks of
  establishing foreign enterprise.
• Lack capital for venture.
• Unfamiliar or politically volatile market.
• Overcomes restrictive
• investment barriers.
• Others can develop business
• applications of intangible
• property.

Agreement where licensor grants rights to
intangible property to another entity for a
specified period of time in return for
royalties.
13
Franchising

• Advantages
• Reduces costs and risk of establishing enterprise
• Disadvantages
• May prohibit movement of profits from one country
  to support operations in another country
• Quality control

Franchiser sells intangible property and insists
on rules for operating business
14
Joint Ventures

• Advantages
• Benefit from local partners knowledge.
• Shared costs/risks with partner.
• Reduced political risk.
• Disadvantages
• Risk giving control of technology to partner.
• May not realize experience curve or location
  economies.
• Shared ownership can lead to conflict

15
Wholly Owned Subsidiary

• Subsidiaries could be Greenfield investments or
  acquisitions
• Advantages
• No risk of losing technical competence to a
  competitor
• Tight control of operations.
• Realize learning curve and location economies.
• Disadvantage
• Bear full cost and risk

16
Advantages and Disadvantages of Entry Modes
17
Selecting an Entry Mode
18
Acquisition and Green-field- pros cons
Greenfield
Acquisition

• Pro
• Can build subsidiary it wants
• Easy to establish operating routines
• Con
• Slow to establish
• Risky
• Preemption by aggressive competitors

• Pro
• Quick to execute
• Preempt competitors
• Possibly less risky
• Con
• Disappointing results
• Overpay for firm
• optimism about value creation (hubris)
• Culture clash.
• Problems with proposed synergies

19
Acquisition or Green-field?
Acquisition
Well-established, incumbent firms.
Competitors interested in entry.
Green-field
embedded skills, routines, culture.
No competitors
20
Strategic Alliances

• Cooperative agreements between potential or
  actual competitors.
• Advantages
• Facilitate entry into market (Motorola and
  Toshiba in 1980s for Japanese Cell phone market)
• Share fixed costs (Boeing and Japanese firms for
  B767)
• Bring together skills and assets that neither
  company has or can develop (technology exchange
  for market Thomson and JVC in videocassette
  recorder)
• Establish industry technology standards (Philips
  NV allied Matsushita to make Digital Compact
  Cassette)
• Disadvantages
• Competitors get low cost route to technology and
  markets

21
Alliances are Popular

• High cost of technology development
• Company may not have skill, money or people to go
  it alone
• Good way to learn
• Good way to secure access to foreign markets
• Host country may require some local ownership

22
Global Alliances, however, are different

• Firms join to attain world leadership
• Each partner has significant strength to bring to
  the alliance
• A true global vision
• Relationship is horizontal not vertical
• When competing in markets not part of alliance,
  they retain their own identity

23
Partner Selection

• Get as much information as possible on the
  potential partner
• Collect data from informed third parties
• Former partners
• Investment bankers
• Former employees
• Get to know the potential partner before
  committing

24
Structuring the Alliance to Reduce Opportunism
25
Characteristics of a Strategic Alliance
Independence of Participants
Benefits
Technology
Products
Control
Ongoing Contributions
Shared Benefits
Markets
Cooperation
14-23
26
Managing the Alliance

• Build trust
• Relational capital
• Learning from partners
• Diffusion of knowledge

27
The Strategy of Multinational Firms and
Competition
28
Case Global strategy at MTV networks

• Established in 1987 owned by Viacom
• Majority of its 2 million viewers outside the
  United States
• Unsuccessful at a single Americanized program
  strategy across Europe
• Successful when program content was localized
• 70 of video content is now local in most
  markets
• MTV uses expatriates to transfer the genetic
  code but later uses local employees to
  understand viewers
• Ratings increased by more than 700 in India in
  1996 advertising revenues by 60 in Europe

29
Strategy the Firm

• Strategy actions that managers must take to
  attain the goals of the firm
• Main goal usually to maximize long-term profit
• Profitability defined by return on sales or
  return on equity

30
Value Creation

• Profit determined by
• The amount of value customers place on firms
  goods or services (V)
• Firms cost of production (C)
• Consumer surplus occurs when price charged by a
  firm on a good or service is less than value
  placed on it by a customer
• Value creation V-C
• Two basic strategies to create value and attain
  competitive advantage according to Porter
• Low cost
• Differentiation strategy

31
Value Creation
32
Strategic Positioning
33
Firm as a Value Chain

• Any firm is composed of a series of distinct
  value creating activities
• Primary activities
• Research development
• Production
• Marketing sales
• Service
• Support Activities
• Materials management or logistics
• Human resource
• Information systems
• Company infrastructure

34
Firm as a Value Chain
35
Strategy in International Business

• Strategy is concerned with identifying and taking
  actions that will lower costs of value creation
  and/or differentiate the firms product offering
  through superior design, quality service,
  functionality, etc

36
Advantages of Global Expansion

• Location economies
• Cost economies from experience effects
• Leveraging core competencies
• Leveraging subsidiary skills
• Profitability is constrained by product
  customization and the imperative of
  localization.

37
Location Economies

• Realized by performing a value creation activity
  in an optimal location anywhere around the globe
• Often arise due to differences in factor costs
• It can lower costs of value to enable low cost
  strategy and/or
• Help in differentiation of products from
  competitors
• Global web different stages of value chain are
  dispersed to those locations where perceived
  value is maximized or costs of value creation are
  minimized

38
Location Economies
Assembly
Creating a Global Web
Parts
Sales
Design
Advertising
Parts
Pontiac LeMans
Parts
39
Caveats

• Complications arise due to
• Transportation costs
• Trade barriers
• Political and economic risks
• US firms have shifted production from Asia to
  Mexico due to
• Low labor costs.
• Proximity to U.S.
• NAFTA.

40
Experience Effects

• The systematic reduction in production costs that
  occurs over the life of a product
• First observed in aircraft industry where unit
  costs reduced by 80 each time output was doubled
• Caused due to
• Learning effects
• Economies of scale

41
Learning Effects

• Cost savings that come from learning by doing
• Arises due to increased worker productivity and
  management efficiency
• Significant in cases of technologically complex
  task as there is a lot to be learned
• Experienced during start-up phase, cease after
  two or three years
• Decline after this point comes from economies of
  scale.

42
Economies of Scale

• Refers to reduction in unit cost by producing a
  large volume of a product
• Sources
• Reduces fixed costs by spreading it over a large
  volume
• Ability of large firms to employ increasingly
  specialized equipment or personnel

43
Strategic Significance of the Experience Curve

• The firm that moves down the experience curve
  most rapidly has a cost advantage over its
  competitors
• Serving the global market
• from a single location helps to
• establish low cost strategy
• Aim to rapidly build up sales
• aggressive marketing strategies
• and first-mover advantages

44
Leveraging Core Competencies

• Core competence Skills within the firm that
  competitors cannot easily match or imitate
• Earn greater returns by transferring these skills
  and/or unique product offerings to foreign
  markets who lack them
• Examples
• Consumer marketing skills of U.S. firms allowed
  them to dominate European consumer product market
  in 1960s and 70s

45
Leveraging subsidiary skills
Unique skills and ideas often developed in
foreign subsidiaries

• Value created by identifying them and applying
  it to a firms global network of operations
• Some Challenges
• Managers must create an environment where
  incentives are given to take necessary risks and
  reward them
• Need a process to identify new skill development
• Need to facilitate transfer of new skills within
  the firm

46
Pressures for cost reductions

• Intense in industries of standardized, commodity
  type product that serve universal needs
• Meaningful differentiation on non-price factors
  is difficult
• Major competitors are based in low-cost locations
• Consumers are powerful and face low switching
  costs
• Liberalization of world trade and investment
  environment
• Examples
• Bulk chemicals, petroleum, steel, personal
  computers

47
Pressures for local responsiveness

• Differences in consumer tastes preferences
• North American families like pickup trucks while
  in Europe it is viewed as a utility vehicle for
  firms
• Differences in infrastructure traditional
  practices
• Consumer electrical system in North America is
  based on 110 volts in Europe on 240 volts
• Differences in distribution channels
• Germany has few retailers dominating the food
  market, while in Italy it is fragmented
• Host-Government demands
• Health care system differences between countries
  require pharmaceutical firms to change operating
  procedures

48
Pressures for cost reduction and local
responsiveness
Generally reflects the position of most
companies
49
Management focus tailoring world cars to the
U.S. market

• Japanese automobile manufacturers customize car
  design to tastes of American consumers
• Toyota released the Tundra with V8 engines which
  looks like a heavy-duty pickup truck with a
  powerful engine
• Nissan let U.S. engineers and planners be
  completely responsible for development of most
  vehicles sold in North America
• Honda customizes the Pilot, its next generation
  SUV according to tastes for American families who
  wanted bigger vehicles with three row seating

50
Strategic Choices

• Four basic strategies to enter and compete in the
  international environment
• International strategy
• Multi domestic strategy
• Global strategy
• Transnational strategy

51
Four Basic Strategies
52
International Strategy

• Create value by transferring valuable core
  competencies to foreign markets that indigenous
  competitors lack
• Centralize product development functions at home
• Establish manufacturing and marketing functions
  in local country but head office exercises tight
  control over it
• Limit customization of product offering and
  market strategy
• Strategy effective if firm faces weak pressures
  for local responsive and cost reductions

53
Multidomestic Strategy

• Main aim is maximum local responsiveness
• Customize product offering, market strategy
  including production, and RD according to
  national conditions
• Generally unable to realize value from experience
  curve effects and location economies
• Possess high cost structure

54
Global Strategy

• Focus is on achieving a low cost strategy by
  reaping cost reductions that come from experience
  curve effects and location economies
• Production, marketing, and RD concentrated in
  few favorable functions
• Market standardized product to keep costs low
• Effective where strong pressures for cost
  reductions and low demand for local
  responsiveness
• Semiconductor industry

55
Transnational strategy

• To meet competition firms aim to reduce costs,
  transfer core competencies while paying attention
  to pressures for local responsiveness
• Global learning
• Valuable skills can develop in any of the firms
  world wide operations
• Transfer of knowledge from foreign subsidiary to
  home country, to other foreign subsidiaries
• Transnational strategy difficult task due to
  contradictory demands placed on the organization
• Example Caterpillar

56
Cost pressures and pressures for local
responsiveness facing Caterpillar
57
Advantages and disadvantages of the four
strategies